By Shelley Smith and Lilian Karunungan Jan. 12 (Bloomberg) -- Indonesia scaled back a sale of dollar-denominated bonds to $2 billion, cancelling plans to sell 30-year debt, people familiar with the transaction said. The government plans to sell 10-year notes at a yield of about 6 percent, a premium of 2.2 percentage points more than similar-maturity U.S debt, according to the people familiar, who asked not to be identified before a public announcement. The Philippines, whose bonds carry the same BB- rating as Indonesia from Standard & Poor’s, sold 2020 securities last week at 5.67 percent, 0.33 percentage point less. Holders of Indonesian debt, including Aberdeen Asset Management Plc and Vegagest SGR SpA, said last week that Indonesia may have to reward investors with higher yields as a rally in emerging-market bonds slows after the biggest gains in six years. Mexico, Poland, the Philippines and Turkey beat Indonesia to the market and raised $8.8 billion in overseas debt sales this year. “The market has rallied a lot and the spreads on Indonesian sovereign are a bit too tight to be attractive,” said Esther Teo, a bond investor at HwangDBS Investment Management in Kuala Lumpur, which manages about $2.3 billion. “We would prefer rupiah bonds for extra yields.” Indonesia’s 11.625 percent dollar debt maturing March 2019 yielded 5.81 percent today, a premium of 2 percentage points over similar-dated U.S. Treasuries. They have returned 51 percent since they were sold on Feb. 27 to yield 11.75 percent, or 8.759 percentage points more than U.S. government debt. Similar-maturity rupiah debt yields 9.55 percent. The latest issuance, which initially targeted between $3 billion and $4 billion, will be priced in New York, the people said. Indonesia hired Barclays Capital Plc, Citigroup Inc. and Credit Suisse Group AG for the sale, a finance ministry official said last month. Emerging Markets The spread between U.S. and developing-nation debt narrowed to 2.64 percentage points yesterday, the lowest in 19 months, according to the JPMorgan Emerging-Market Bond Index Plus. The gap shrank 4.16 percentage points in 2009 as interest- rate cuts and stimulus spending revived the global economy from a recession. Pacific Investment Management Co., the world’s biggest bond fund, said last week it was “highly unlikely” developing nations’ dollar debt would perform as well as last year, when the EMBI+ index returned 26 percent. “There’s a big rush to get out the door before U.S. Treasury yields rise further,” Edwin Gutierrez, who oversees $5 billion in emerging-market debt for Aberdeen in London, said before the sale. “We just don’t see much value at these levels” for sovereign dollar debt, he said. Debt Rally Indonesia’s dollar bonds are the third-best performing in the region, after Pakistan and India, giving investors a return of 45 percent in the past year, according to indexes compiled by HSBC Holdings Plc. Debt of the Philippines returned 22 percent. The bond sale was designed to help 47-year-old Finance Minister Sri Mulyani Indrawati reduce a budget deficit forecast to reach 98 trillion rupiah ($10.7 billion) this year, equal to 1.6 percent of gross domestic product. Sri Mulyani, named Finance Minister of the Year by Euromoney magazine in 2006, this week announced plans to sell $750 million to $1 billion of so- called Samurai bonds this year. Indonesia fared better than its neighbors in the economic slump, as growth in the $514 billion economy accelerated last quarter for the first time in a year. President Susilo Bambang Yudhoyono, 60, who won re-election in 2009, aims to boost the country’s expansion to more than 7 percent from an average of 5.1 percent last decade. Moody’s Investors Service on Sept. 16 raised the nation’s rating by one level to Ba2, two levels below investment grade, citing the economy’s resilience. To contact the reporters on this story: Shelley Smith at ssmith118@bloomberg.net; Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net.

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